Dairy prices bode ill for Fonterra payout - economists

It's early days, but Fonterra will need to revise down its dairy payout for 2012/13 if the weaker prices evident in today's dairy auction are anything to go by, rural economists say.

The price of dairy product fell in Fonterra's latest GlobalDairyTrade auction, the GDT-TWI Price Index, dropping by 5.9 per cent compared to the last sale in June. The average winning price dropped to US$2,787 a tonne from US$3,042 a tonne at the last auction a fortnight ago.

Prices for whole milk powder - the biggest product by volume - fell by 4.1 per cent to US$2,760 a tonne and skim milk powder prices fell 9.8 per cent to US$2,599 a tonne.

The total volume sold rose to 38,066 tonnes from 25,606 tonnes in the previous auction.

The auction follows the release on Monday of the ANZ Commodity Price Index, which fell to its lowest level in more than two years in June.

Bank of New Zealand economists said today's auction, which followed encouraging signs from the previous two auctions, could have gone either way.

"It is still early days in the dairy season, but this bodes ill for payout calculations and may limit some of the recent NZ dollar enthusiasm," the bank said in a commentary.

In May, Fonterra cut its forecast farmgate milk price for 2011/12 by 30c to $6.05 per kg of milksolids and to $5.50 per kg for 2012/13 because of depressed prices on the global dairy market.

ANZ rural economist Con Williams said volumes were up at today's auction, but were not out of line with volumes that are usually sold for this time of the year.

Williams said prices were about 10 to 15 per cent too light for Fonterra to hit its initial 2012/13 farmgate milk price forecast of $5.50 per kg.

Current spot pricing for the year-to-date, and the strong New Zealand dollar, would mean a payout closer to $5.10 to $5.20 for 2012/13, although "there is still a lot of water to flow under the bridge," Williams said.

He told APNZ auction prices would need to rise and the New Zealand dollar - currently trading firmly at around US80.5c - would need to fall if Fonterra were to meet its forecast for 2012/13.

"We see issues - particularly because the cost of production has gone up so much over the last 10 to 12 seasons," he said. "While $5.50 or the low $5s might be around historical averages, its problematic from a dairy farmer's point of view because the cost of production has gone up so much over that period of time," he said.